Fourth Quarter 2025
Portfolio Strategy Report (Q4 2025)
All prices, returns and portfolio weights are as of market close on September 30, 2025, unless otherwise indicated.
The invisible engine effect
There is a deep contradiction between perception and reality that is currently playing out in the U.S. economic landscape. In many ways, it reminds us of the setting to the famous 1999 movie, The Matrix (a friendly spoiler alert for those that haven’t seen it – skip ahead to the next paragraph). In the movie, the world in which the protagonist wakes up is a simulated reality powered by an engine that most don’t see. This “invisible engine” dynamic helps us square the inconsistency between the prevailing narrative of U.S. economic fragility and incoming data that shows resilience.
Chart 1 – Despite headwinds, the U.S. economy remains strong
SAAR = seasonally adjusted annualized rate. Forecast is based on Atlanta Fed GDPNow Model estimate as of September 27, 2025.
For instance, the Federal Reserve (Fed) delivered on expectations of a 25 basis point (bps) cut in September largely because it judged that the balance of risks had shifted, and that the employment backdrop was deteriorating. That made sense given the massive revisions lower to nonfarm job gain estimates over the past few months, and also because of how subdued household sentiment has been of late. Indeed, the University of Michigan Consumer Sentiment Index has been falling over the past few months due (largely) to falling expectations for the economy.
But despite all of that, the hard data on real activity has been surprisingly strong. For instance, the final estimate for Q2 GDP came in at 3.8% on an annualized basis. That is well above what the first estimate had indicated (3.0%) and what many private sector economists had anticipated (3.3%). What’s more is that this revision was primarily driven by stronger than expected household consumption (revised higher from 1.4% to 2.5%).
To add to the surprise, we now have reputable ‘Nowcast’ models run by regional Fed banks that are telling us that the U.S. economy likely expanded by 3-4% again in Q3. That is also on the heels of a string of strong retail sales reports, as well – further proof that households are actively spending money on goods and services despite challenging job prospects and plummeting sentiment.
Clearly, there is an “invisible engine” that is working overtime to ensure that the economy (and markets) continue to hum. And in our minds, that engine is the massive amount of capital expenditures tied to AI-related projects.
We can see evidence of this in two ways:
- First, growth in key AI proxies within the GDP report (spending on software and research/development) have outpaced that of household consumption over the past four quarters (Chart 2).
- Second, the top-performing sectors since ‘Liberation Day’ (April 2) are Communications, Technology and Utilities. All three of them have been tied to the AI boom – and the resulting gains for portfolios have led to increased wealth for American households. In turn, that has engendered an increase in spending on goods and services among the wealthiest Americans.
Chart 2 – Average growth in key GDP categories over the past four quarters
All the above tell us that the current AI boom is not just a market story – it’s an economic one too. That will have meaningful implications for our portfolios:
- For one, it tells us that while the economy outside of the AI-related space is slowing, the Fed will likely not ease by as much as the market is expecting. When taken with the term premium risks that we have highlighted in our other work, this suggests more headwinds than tailwinds for the sovereign fixed income space – regardless of what part of the curve we are talking about.
- Second, we are going to continue to lean into the AI story while also paying tribute to the fact that other parts of the economy are slowing to a degree. That means maintaining exposure to sectors that leverage AI spending whilst also prioritizing ‘Quality’ as a factor.
Indeed, our enthusiasm for Quality is borne out from our concern that the AI boom is masking weakness in other areas of the economy and the market. A “tighter for longer” Fed policy is an indication that the credit cycle should slow further. At the margin, that means that exposure to firms with strong balance sheets, low degree of leverage and stable cash flow is the optimal path to follow from here.
- Third (and indirectly related to the prior two implications), we see increased value in Gold and other alternative assets as diversifiers with upside. Indeed, there is now a whiff of retail/institutional investor enthusiasm for the precious metal relative to years past – when it was primarily central banks and macro investors driving the bus.
Heading into the home stretch of 2025, we are aligning our portfolios to take advantage of a mix of the above three implications. Unlike our hero Neo in the Matrix movies, we don’t have the benefit of knowing which reality is true at this point. Nevertheless, we’re still confident that our emphasis on AI, Quality and Gold leaves us in decent shape to dodge any market-related bullets (slow motion or not).
Balanced Portfolio for Q4 2025
Investment Objective and Strategy:
The strategy involves tactically allocating to multiple asset-classes and geographies to achieve long-term capital appreciation and total return by investing primarily in ETFs
| Ticker | ETF Name | Sector | Positioning | Price | Management Fee | Weight (%) | 90-Day Volatility | Volatility Contribution | Annualized Distribution Yield (%)* | Yield/Volatility** |
|---|---|---|---|---|---|---|---|---|---|---|
| Fixed Income | ||||||||||
| ZDB | BMO Discount Bond Index ETF | Fixed Income | Core | $15.21 | 0.09% | 5.0% | 4.16% | 2.26% | 2.36% | 0.57 |
| ZBI | BMO Canadian Bank Income Index ETF | Fixed Income | Core | $31.05 | 0.25% | 10.0% | 2.59% | 2.82% | 4.13% | 1.59 |
| ZUCM.U | BMO USD Cash Management ETF (USD Units) | Fixed Income | Tactical | $30.08 | 0.12% | 5.0% | 1.25% | 0.68% | 4.15% | 3.32 |
| Total Fixed Income | 20.0% | 5.77% | ||||||||
| Equities | ||||||||||
| ZUQ | BMO MSCI USA High Quality Index ETF | Equity | Core | $93.87 | 0.30% | 20.00% | 10.76% | 23.45% | 0.47% | 0.04 |
| ZCN | BMO S&P/TSX Capped Composite Index ETF | Equity | Core | $39.96 | 0.05% | 17.00% | 7.96% | 14.74% | 2.30% | 0.29 |
| ZIQ | BMO MSCI EAFE High Quality Index ETF | Equity | Tactical | $31.71 | 0.35% | 12.00% | 13.27% | 17.35% | 0.00 | |
| ZXLU.F | BMO SPDR Utilities Select Sector Index ETF (CAD Hedged) | Equity | Tactical | $32.97 | 0.19% | 5.00% | 12.92% | 7.04% | 0.00 | |
| ZEM | BMO MSCI Emerging Markets Index ETF | Equity | Tactical | $26.57 | 0.25% | 10.00% | 11.46% | 12.48% | 2.08% | 0.18 |
| Total Equity | 64.0% | 75.06% | ||||||||
| Non-Traditional Hybrids | ||||||||||
| ZLSC | BMO Long Short Canadian Equity ETF | Hybrid | Tactical | $41.53 | 0.65% | 4.00% | 5.99% | 2.61% | 1.53% | 0.26 |
| ZWGD | BMO Covered Call Spread Gold Bullion ETF | Hybrid | Tactical | $33.36 | 0.65% | 10.00% | 13.02% | 14.18% | 0.00 | |
| ZGI | BMO Global Infrastructure Index ETF | Hybrid | Tactical | $52.94 | 0.55% | 2.00% | 10.93% | 2.38% | 2.67% | 0.24 |
| Total Alternatives | 16.00% | 19.17% | ||||||||
| Total Cash | 0.00% | 0.00% | ||||||||
| Portfolio | 0.28% | 100.0% | 9.18% | 100.0% | 1.55% | 0.17 | ||||
As of September 30, 2025. Model portfolio for illustrative purposes only. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. These are not recommendations to buy or sell any particular security. Particular investments and/or trading strategies should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.
* The Annualized Distribution Yield is calculated by taking the most recent regular distribution, or expected distribution, (excluding additional year end distributions) annualized for frequency, divided by current NAV. The yield calculation does not include reinvested distributions.
Yield calculations for bonds are based on yield to maturity, including coupon payments and any capital gain or loss that the investor will realize by holding the bonds to maturity and. For equities, it is based on the most recent annualized income received divided by the market value of the investments. Please note yields of equities will change from month to month based on market conditions.
Changes to the balanced portfolio from Q3 2025
Sell/Trim |
Ticker |
Old weight |
(%) Change |
New weight |
5% |
-5% |
0% |
||
15% |
-15% |
0% |
||
15% |
-15% |
0% |
||
6% |
-6% |
0% |
||
5% |
-5% |
0% |
||
5% |
-1% |
4% |
||
5% |
-3% |
2% |
Buy/Add |
Ticker |
Old weight |
% Change |
New weight |
0% |
5% |
5% |
||
15% |
5% |
20% |
||
0% |
17% |
17% |
||
0% |
12% |
12% |
||
0% |
5% |
5% |
||
9% |
1% |
10% |
||
5% |
5% |
10% |
As of September 30, 2025. Model portfolio for illustrative purposes only. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. These are not recommendations to buy or sell any particular security. Particular investments and/or trading strategies should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.
Asset Allocation:
- We are shifting our equity tilt slightly. Compared to Q3, we are now modestly overweight and increasing the allocation to 64% from our benchmark 60%. Again, we feel this is justified given the still constructive fundamentals in the U.S., and to a lesser degree, Canada.
- Much like last quarter, we remain underweight fixed income relative to our benchmark (20% versus 30%).
- In the developed markets, most central banks are either close to, or at the end of their easing cycles. That leaves little impetus for upside in the front-end (including for the Bank of Canada). Meanwhile, the Bank of Japan is the sole developed market central bank that is still in the midst of a hiking cycle (which is bearish for the front-end of the JPY curve). In the U.S., there is already an aggressive easing profile priced in for the Fed.
- Further out the curve, there is still the risk of rising term premiums from increased supply. In our minds, rates need to get to a higher level before we would gauge them as ‘cheap enough’ to establish fresh longs.
- In the alts/hybrid sleeve, we remain overweight relative to our benchmark but are curbing our exposure slightly.
Equities
- Within the equity sleeve, we are pivoting towards Quality as a factor and exposure to AI as a theme. For instance, in the US, we are increasing our core position in ZUQ (BMO MSCI USA High Quality Index ETF) while establishing a long position in the Utilities sector via ZXLU.F (or the BMO SPDR Utilities Select Sector Index ETF – Hedged-to-CAD). The added benefit of increasing our exposure to ZUQ means that we’ll also increase our exposure to sectors that are best positioned to capitalize on AI-related themes as well (Tech and Communications).
- For our Canadian exposure, we have elected to switch out of ZLB (BMO Low Volatility Canadian Equity ETF) and into ZCN (BMO S&P/TSX Capped Composite Index ETF). The reason? The latter gives us more exposure into sectors that should continue to perform (Materials and Financials). Materials, in particular, is well placed given the more diversified exposure to gold miners.
- We have also made the decision to exit out of our position in ZLI (BMO Low Volatility International Equity ETF) and opted for ZIQ (BMO MSCI EAFE High Quality Index ETF). With trade tensions now receding into the backdrop, we feel that Quality should outperform as a factor as opposed to Low Vol.
- We have increased our position in ZEM (BMO MSCI Emerging Markets Index ETF) slightly. At the same time, we are cutting our positions in ZIN (BMO Equal Weight Industrials Index ETF).
Fixed Income
- Relative to our Q3 portfolio, we are keeping our exposures the same for ZDB (BMO Discount Bond Index ETF) and for ZBI (BMO Canadian Bank Income Index ETF).
- We are switching out of our long position in ZTS (BMO Short-Term US Treasury Bond Index ETF) for ZUCM.U (BMO USD Cash Management ETF in USD Units).
- The reason for that switch is that we feel that US rates (even in the front-end) remain vulnerable as US fundamentals remain strong. As such, we like the ultra-short end of the curve to play any further Fed rate cuts.
Alts/hybrids
- We are increasing our allocation to ZWGD (BMO Covered Call Spread Gold Bullion ETF) to take advantage of what we feel is the start of another leg higher in Gold.
- Given the anticipated decline in uncertainty, we are cutting our exposure to ZLSU (BMO Long Short US Equity ETF) and making a slight tweak to our holding in ZLSC (BMO Long Short Canadian Equity ETF). We are also curbing our exposure to ZGI (BMO Global Infrastructure Index ETF).
Fund Performance (%)
Ticker |
Year-to-date |
1-month |
3-month |
6-month |
1-year |
3-year |
5-year |
10-year |
Since inception |
Inception date |
17.51% |
4.95% |
9.81% |
14.04% |
25.76% |
17.40% |
14.92% |
10.79% |
9.06% |
2009-05-29 |
|
15.02% |
1.36% |
10.86% |
11.78% |
18.67% |
12.10% |
5.97% |
7.05% |
5.32% |
2009-10-20 |
|
2.85% |
1.22% |
6.59% |
-0.78% |
9.89% |
22.94% |
14.56% |
15.75% |
16.16% |
2014-11-05 |
|
0.88% |
0.32% |
-0.48% |
-1.37% |
2.71% |
3.74% |
-0.59% |
1.65% |
2.22% |
2014-02-10 |
|
2.57% |
-0.05% |
0.26% |
-0.83% |
10.93% |
7.73% |
11.13% |
8.00% |
11.35% |
2010-01-19 |
|
Returns are not available as there is less than one year’s performance data. |
2024-10-24 |
|||||||||
3.55% |
0.53% |
1.71% |
2.18% |
6.87% |
6.53% |
— |
— |
4.03% |
2022-02-07 |
|
2.81% |
0.37% |
1.06% |
2.10% |
4.41% |
— |
— |
— |
4.91% |
2023-09-27 |
|
13.25% |
1.78% |
5.79% |
13.20% |
19.98% |
— |
— |
— |
20.61% |
2023-09-27 |
|
Returns are not available as there is less than one year’s performance data. |
2025-02-04 |
|||||||||
Returns are not available as there is less than one year’s performance data. |
2025-05-22 |
|||||||||
Bloomberg, as of September 30, 2025.
Portfolio Characteristics
Regional breakdown
Sector breakdown
Fixed Income breakdown
Federal |
10.4% |
Weighted Average Term |
3.43 |
Provincial |
8.0% |
Weighted Average Duration |
2.76 |
Corporate |
56.2% |
Weighted Average Coupon (%) |
2.77 |
Municipal |
0.3% |
Annualized Dist. Yield (%) |
2.66 |
Weighted Average Yield to Maturity (%) |
2.59 |
Source: BMO Global Asset Management. Model portfolio for illustrative purposes only. As of September 30, 2025.
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The portfolio holdings and asset allocations are subject to change without notice and individual holdings only represent a small percentage of portfolio holdings. They are not recommendations to buy or sell any particular security.
Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent prospectus.
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